INTEREST EARNED FROM CO-OPERATIVE BANK ELIGIBLE FOR SECTION 80P(2)(d); REASSESSMENT QUASHED

ISSUE

Whether a co-operative society (whose banking license was cancelled) is eligible for deduction under Section 80P(2)(d) on interest income earned from investments made with a Co-operative Bank.
Whether a reassessment notice under Section 148 issued solely on the ground of denying such deduction is valid in law.

FACTS

Status of Assessee: The assessee was originally a co-operative bank. However, its banking license was cancelled by the RBI in 2004. Since then, it has functioned solely as a co-operative society.
Assessment Year: 2020-21.
The Claim: The assessee filed its return claiming deduction under Section 80P(2)(d). This section allows a co-operative society to deduct interest/dividend income earned from investments with another co-operative society.
The Dispute: The income in question was interest earned from investments made with a Co-operative Bank.
Reassessment: The Assessing Officer (AO) issued a notice under Section 148, alleging that the deduction was wrongly claimed because the interest was from a “Bank” and not a “Co-operative Society,” purportedly relying on Section 80P(4) (which excludes co-operative banks from 80P benefits).

DECISION

Co-op Bank is a Co-op Society: The Court held that a “Co-operative Bank” is essentially a co-operative society registered under the Co-operative Societies Act. It is a species of the genus “co-operative society.”
Eligibility under 80P(2)(d): Consequently, interest earned by a co-operative society from deposits with a co-operative bank qualifies as income from investments with “another co-operative society.” Therefore, the deduction under Section 80P(2)(d) is available.
Reassessment Invalid: Since the deduction was legally permissible, the very basis for forming a “reason to believe” that income had escaped assessment was flawed.
Verdict: The impugned notice issued under Section 148 was quashed and set aside. [In Favour of Assessee]

KEY TAKEAWAYS

The “Totgar’s Sale” Distinction: The Department often cites the Totgar’s Sale judgment to deny 80P on bank interest. However, courts distinguish between interest from Commercial Banks (often taxable) and interest from Co-operative Banks (deductible u/s 80P(2)(d)).
Status Matters: The fact that the assessee’s banking license was cancelled actually helped clarify that it was purely a society (not a bank hit by Section 80P(4)), and thus fully eligible for 80P deductions.
Section 80P(4) Limit: Section 80P(4) denies deductions to a Co-operative Bank. It does not deny deductions to a regular society on interest earned from a Co-operative Bank.

HIGH COURT OF GUJARAT

Diamond Jubilee Co-Operative Bank Ltd.

Union of India

A.S. Supehia and Pranav Trivedi, JJ.

R/SPECIAL CIVIL APPLICATION NO. 15085 of 2025

NOVEMBER 25, 2025

Ms. Ankita S. Shah for the Petitioner. Karan G. Sanghani, Adv. and Pradip D. Bhate for the Respondent.

JUDGMENT

A.S. Supehia, J.- Rule. Learned Senior Standing Counsel Mr.Karan Sanghani, waives service of notice of rule on behalf of the respondents. Since short issue is involved and since it is submitted that the issue is squarely covered by the decision of this Court in the case of Principal Commissioner of Income-tax v. Ashwinkumar Arban Co Operative Society Ltd. (Gujarat), the matter is taken up for final disposal today.

2. The petitioner has approached this Court praying for quashing and setting aside the notice dated 29.06.2025 issued under Section 148 of the Income-tax Act (for short “the Act”), the order dated 29.06.2025 passed under Section 148A(3) of the Act, and the show-cause notices dated 31.03.2025 and 23.05.2025 issued under Section 148A(1) of the Act as they are without jurisdiction, arbitrary, illegal and unconstitutional and violative of Articles 14 and 265 of the Constitution of India.

3. Brief facts of the case are as under:

3.1 The petitioner is a Co-operative Society registered under the relevant laws of the State of Gujarat, formerly engaged in the business of banking until the cancellation of its license by the Reserve Bank of India on 19.06.2004. Thereafter, the petitioner has been functioning solely as a Co-operative Society through its Official Liquidator.

3.2 For the Assessment Year 2020-21, the petitioner filed its return of income under Section 139(1) of the Act on 31.12.2020, duly verified in accordance with law. The return was selected for scrutiny. Notices under Section 143(2) of the Act dated 29.06.2021 and under Section 142(1) of the Act dated 04.01.2022 and 25.01.2022 were duly issued by the Department and complied with by the petitioner. Detailed replies with supporting material were furnished on 29.01.2022. Another notice dated 30.08.2022 was issued and was duly responded to on 07.09.2022.

3.3 Respondent No.2 completed the scrutiny assessment under Section 143(3) read with Section 144B of the Act vide order dated 26.09.2022. Subsequently, on 31.03.2025, and again on 23.05.2025, respondent No.2 issued notices under Section 148A(1) of the Act. These notices were purportedly based on an unsigned Audit Memorandum and alleged that the petitioner had wrongly claimed deduction under Section 80P(2)(d) on interest income earned from Co-operative Banks. The petitioner submitted detailed replies/objections dated 23.04.2025 and 27.05.2025.

4. Learned advocate Ms.Ankita Shah for the petitioner submitted that since the petitioner is not a Co-operative Bank but a Co-operative Society, whose license was cancelled in 2004, the deduction claimed under Section 80P(2)(d) is legally valid and supported by the decision in the case of Ashwinkumar Arban Co Operative Society Ltd (supra).

4.1 It is submitted that though such objections were raised before respondent No.2, respondent No.2 passed the impugned order under Section 148A(3) of the Act dated 29.06.2025 and also issued a notice on the same date under Section 148 of the Act. It is submitted that, thus, the present writ petition may be allowed in terms of the judgement passed in the case of Ashwinkumar Arban Co-operative Society Ltd. (supra).

4.2 Learned Senior Standing Counsel Mr.Karan Sanghani appearing for the respondents was unable to controvert the fact that the issue is squarely covered by the decision of this Court in the case of Ashwinkumar Arban Co-operative Society Ltd. (supra).

4.3 Thus, it is not in dispute that the petitioner is not a Cooperative Bank but a Co-operative Society whose license was cancelled in 2004 and claimed deduction under Section 80P(2)(d) of the Act. The aforesaid issue was considered by this Court in the case of Ashwinkumar Arban Co-operative Society Ltd. (supra). Relevant observations are as under:

“30. Moreover, as reliance placed on the aforesaid decision for applicability of section 80P(4) of the Act in the Tacts of the case is also not possible to accept as section 80P(4) of the Act would be applicable to the cooperative bank when the cooperative bank is liable to pay tax under the provisions of the Act and in such eventuality, the provision of section 80P would not be applicable as per the amendment of sub-section (4) of section 80P of the Act. Therefore, the exclusion of applicability of section 80P to cooperative banks by section 80P (4) of the Act would not disentitle the respondent assessee from claiming deduction under section 80P(2)(d) of the Act in absence of any amendment in the said section and that would not be sufficient to deny the claim of the respondent assessee for deduction of interest earned from investment made in a cooperative bank which is also a cooperative society from the total income.

31. The Hon’ble Apex Court in case of Kerala Stote Co-operative Agricultural & Rural Development Bank Ltd. (supra) while considering various provisions of the Banking Regulation Act read with provisions of the Income Tax Act has held that the provision of section 80P(4) of the Act would not be applicable to a cooperative bank which is not a bank as per the provisions of the BR. Act, 1949, as under:

“5. Interpretation. In this Act, unless there is anything repugnant in the subject or context, X X X

(b) “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

Explanation-Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause.”

32. After considering the above interpretation of various provisions and the Case laws, the Hon’ble Apex Court has analyzed the provisions as under:

“14.1. In Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd., it was categorically held that under Section 56 of the BR Act, 1949 only three co-operative banks have been defined, namely, state cooperative bank, central co-operative bank and primary co-operative bank which are covered under Section 56 (cci) read with (ccvii) read with the provisions of the NABARD Act, 1981. Thus, it is only these three banks which are co-operative banks which require a licence under the BR Act, 1949 to engage in banking business. If any bank does not fall within the nomenclature of the aforesaid three banks as defined under the NABARD Act. 1981, it would not be a co-operative bank within the meaning of Section 56 of BR Act, 1949 irrespective of whatever nomenclature it may have or structure it may possess or incorporated under any Act. It was further stated that if a bank has to be a state cooperative bank, there has to be a declaration made by the State Government in terms of Section 2(u) of NABARD Act, 1981. Hence, it is necessary to go into the question as to, whether, the appellant herein has been so declared as a state cooperative bank. This question would need not detain us for long as the Kerala High Court in AP Varghese had categorically stated that the Kerala State Co-operative Bank” is a “state co-operative bank as defined under the NABARD Act, 1981. Therefore, the appellant bank has not been declared as a state co-operative bank under the provisions of NABARD Act, 1981. further, in the case of Mavilayi Service Cooperative Bank, this Court observed that a co-operative bank would engage in banking business on obtaining a licence under Section 22(1b) of the BR Act, 1949. In the instant case, the appellant herein is a co-operative bank having regard to the aforesaid conspectus of the provisions so as to require a licence under the aforesaid provision for carrying on banking business. In the circumstances, the question could still arise as to whether the appellant herein is entitled to benefit of deduction under Section 80P of the Act.

14.2 In Mavilayi Service Co-operative Bank, it has been observed that Section 80P of the Act is a beneficial provision which was enacted in order to encourage and promote the growth of the cooperative sector generally in the economic life of the country and therefore, has to be read liberally in favour of the assessee. That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub-section (2) of Section 80P must be given by way of deduction vide Citizen Cooperative Society This is because sub-section (4) of Section 80P is in the nature of a proviso to the main provision contained in sub-sections (1) and (2) of Section 80P The proviso excludes co-operative banks, which are co-operative societies which must possess a licence from the Reserve Bank of India to do banking business. In other words, if an entity does not require a licence to do banking business within the definition of banking under Section5(b) of the BR Act, 1949, then it would not fall within the scope of sub-section (4) of Section 80P.

14.3. While analysing Section 80P of the Act in depth, the following points were noted by this Court

(1) Firstly, the marginal note to Section 80P which reads “Deduction in respect of income of co-operative societies” is significant as it indicates the general drift of the provision.

(ii) Secondly, for purposes of eligibility for deduction, the assessee must be a “co-operative society”.

(iii) Thirdly, the gross total income must include income that is referred to in sub-section (2).

(iv) Fourthly sub-clause (2)(a)(i) speaks of a co-operative society being “engaged in”, inter alia, carrying on the business of banking or providing credit facilities to its members.

(v) Fifthly, the burden is on the assessee to show, by adducing facts, that it is entitled to claim the deduction under Section 80P.

(vi) Sixthly, the expression “providing credit facilities to its members” does not necessarily mean agricultural credit alone. It was highlighted that the distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one. Since profits and gains from credit facilities given to non-members cannot be said to be attributable to the activity of providing credit facilities to its members, such amount cannot be deducted.

(vii) Seventhly, under Section 80P(1) (c), the co-operative societies must be registered either under Cooperative Societies Act, 1912. or a State Act and may be engaged in activities which may be termed as residuary activities i.e activities not covered by sub-clauses (a) and (b), either independently of or in addition to those activities, then profits and gains attributable to such activity are also liable to be deducted, but subject to the cap specified in sub-clause (c).

(viii) Eighthly, sub-clause (d) states that where interest or dividend income is derived by a co-operative society from investments with other cooperative societies, the whole of such income is eligible for deduction, the object of the provision being furtherance of the co-operative movement as a whole.

14.4 In paragraph 42 of Mavilayi Service Co-operative Bank, this Court observed that the object and purpose of sub-section (4) of Section 80P is to exclude only co-operative banks that function on par with other commercial banks ie which lend money to members of the public. That on a reading of Section 3 read with Section 56 of the BR Act, 1949, the primary co-operative bank cannot be a primary agricultural credit society. As such co-operative bank must be engaged in the business of banking as defined by Section 5(b) of the BR Act, 1949, which means accepting, for the purpose of lending or investment, of deposits of money from the public. Also under Section 22(1)(b) of the BR Act, 1949, no co-operative society can carry on banking business in India, unless it is a co-operative bank and holds a licence issued in that behalf by Reserve Bank of India. It was pointed out that as opposed to the above, a primary agricultural credit society is a co-operative society, the primary object of which is to provide financial accomodation to its members for agricultural purposes or for purposes connected with agricultural activities.

14.5 It was further observed in the said case that some primary agricultural credit societies had sought for banking licence from Reserve Bank of India but the same was turned down by observing that such a society was not carrying on the business of banking and that it did not come under the purview of Reserve Bank of India requiring a licence for its business.

14.6 Thereafter in paragraph 48 of the judgment, it was observed that a deduction that is given without any reference to any restriction or limitation cannot be restricted or limited by implication. That subsection (4) of Section 80P which is in the nature of a proviso specifically excludes co-operative banks which are co-operative societies engaged in banking business i.e engaged in lending money to members of the public, which have a licence in this behalf from Reserve Bank of India”

33. In view of the above dictum of law as well as the provisions of the Act which are considered we are of the opinion that the provisions of section 80P(2)(d) would be applicable in the facts of the case and the PCIT was not justified in invoking revisional powers under section 263 of the Act which is rightly reversed by the Tribunal holding that the cooperative bank is a cooperative society registered under the Gujarat State Cooperative Societies Act and in view of the various decisions of the Court, the Tribunal after following the same has come to the conclusion that the assessment was not erroneous allowing deduction of section 80P(2) (d) of the Act which is in consonance with the various decisions of the Court as a twin condition invoking section 263 as to the assessment being erroneous and prejudicial to the interest of the revenue are not being fulfilled.”

5. Thus, as held by the Supreme Court in the case of Apex Co-operative Bank of Urban Bank of Maharashtra & Goa Ltd. v. Maharashtra State Co-operative Bank Ltd. [2003] 117 COMP CASE 618/48 SCL 319 (SC)/2003 (11) SCC 66 for which the reliance is placed by the Co-ordinate Bench, and also in case of Kerala State Co-Operative Agricultural & Rural Development Bank Ltd. v. Assessing Officer ITR 384 (SC), the present writ petition is allowed as the petitioner is not a Co-operative Bank but a Co-operative Society.

6. Hence, as per the settled legal precedent, deduction under Section 80P(2)(d) is available to Co-operative societies on income earned as interest on investment made with Cooperative Bank which in turn, is a Co-operative Society itself and as the observations recorded by the respondent are incorrect and thus contrary to the judgement of this Court.

7. The present writ petition succeeds and the impugned notice dated 29.06.2025 issued under Section 148 of the Income-tax Act, order dated 29.06.2025 passed under Section 148A(3) of the Act, and show-cause notices dated 31.03.2025 and 23.05.2025 issued under Section 148A(1) of the Incometax Act, 1961 are quashed and set aside. Rule is made absolute accordingly.